Israel finance minister has golden reform opportunity

Yair Lapid (C), speaks during a Yesh Atid party meeting, at the Knesset, the Israeli parliament, in Jerusalem March 4, 2013. REUTERS/Ronen Zvulun

JERUSALEM (Reuters) - New Israeli Finance Minister Yair Lapid, who once told Benjamin Netanyahu he didn’t “know anything about economics,” has a golden opportunity to push through much-needed structural reforms to lower the deficit and boost the economy.

Lapid, who turned to politics only last year after almost 30 years as a newspaper and TV journalist, takes office as public anger at generous entitlements for the ultra-Orthodox reaches a peak.

Unlike many past governments, however, the ruling coalition sworn in on Monday has no ultra-Orthodox parties in it, meaning Lapid can make good on his campaign promises to ease the increasingly heavy burden on the middle class.

His most immediate concern will be to show investors he can push through a responsible budget for 2013. The last government went on a spending spree despite slower economic growth that stunted tax income, meaning the new administration must make huge spending cuts and hike taxes to keep the budget deficit from spiraling out of control.

Last year the deficit reached 4.2 percent of gross domestic product (GDP), more than double the initial target of 2 percent.

The 2013 deficit target is 3 percent of GDP and analysts doubt that estimated spending cuts of about 14 billion shekels ($4 billion) and tax hikes of some 6 billion shekels currently planned will be enough to meet that goal.

Lapid will likely have up to 120 days to get the 2013 budget approved by lawmakers.

The free market views he shares with Netanyahu and new Economy and Trade Minister Naftali Bennett could enable the government to make major cuts to child allowances, which benefit the traditionally large families of the ultra-Orthodox, and to stipends to religious institutions.

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Another area where he could wield the axe is the defense budget, formerly a sacred cow. He will also need to devise ways to put a lid on housing prices.

All of this risks turning Lapid from the most popular politician in Israel to public enemy No. 1, because some of the measures he makes will also undoubtedly harm the middle class that he championed in his campaign.

Still, the 49-year-old son of a former justice minister appears to be ready for that.

“Being popular is great fun but it is not a goal,” he wrote on his Facebook page. “If I start to ask myself before any decision if this won’t harm my popularity, I wouldn’t make any decisions.”

HIGH LIVING COSTS

Following mass protests in the summer of 2011 at a rise in the cost of living, Lapid in early 2012 formed the Yesh Atid party - Hebrew for “There is a Future”.

Capitalizing on public outrage at a jump in the price of Israeli food staple cottage cheese and electricity rates as well as soaring housing prices, Yesh Atid won 19 seats in the 120-seat parliament in January’s election.

That made his the second-largest group in parliament behind Netanyahu’s Likud-Beitenu alliance which garnered 31 seats.

Lapid’s main aim in joining the government was to ensure that all Israelis “share in the national burden”, a euphemism for working and paying taxes and doing military service, compulsory for most Israeli 18-year-olds.

Most of Israel’s ultra-Orthodox - some 10 percent of a population of 8 million but growing fast - do not work, receive military service exemptions and rely heavily on state subsidies.

Throughout the six-week coalition negotiations, Lapid said he would not partner with the ultra-Orthodox parties that Netanyahu preferred to have in his coalition.

Lapid, whose election slogan was “Where’s the money?”, downplayed the need to be an economist for the job, saying he would surround himself with top economic professionals.

One of his key decisions will be to name a replacement for central bank governor Stanley Fischer, who is leaving at the end of June after eight years and is widely credited for keeping Israel’s economy afloat during the global economic crisis.

Lapid’s success may depend largely on how much backing Netanyahu gives his new finance minister.

“How policies will be implemented has a lot to do with the political backing the minister of finance will get,” said Gil Bufman, chief economist at Bank Leumi.

“If he gets a high degree of support ... the ability is there to move ahead with difficult and painful steps.”